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Change: the Only Sure Thing

Which headline is better for grabbing your attention and prompting you to read the article to which it’s attached: “Credit Reports to Exclude Certain Negative Information, But Read on to See if This Even Applies to You” or “Credit Reports to Exclude Certain Negative Information, Boosting FICO Scores”?  Obviously, the former is less than tantalizing while the latter makes you say, “Tell me more!”  I was in the “tell me more” camp, and the folks at The Wall Street Journal sucked me into their vortex.

The development, set to go into practice on July 1st, is certainly a departure from how the Big Three (Experian, TransUnion, and Equifax) have done things in the past, but it’s not going to wave a magic wand and make bankruptcies, foreclosures, short sales, etc., go away.  It’s sort of a bittersweet development.  Let me explain:

Many tax liens and civil judgments will be removed from people’s credit reports if they don’t include a complete list of at least three data points: a person’s name, address, and either a social security number or date of birth.  Many liens and most judgments don’t include all three or four. This change will apply to new tax-lien and civil-judgment data that are added to credit reports as well as existing data on the reports. Among the reasons cited for this change included the need to improve standards for public-records data by using better identity-matching criteria and updating records more frequently.  As we all know, inaccurate information on your credit report can have severely negative consequences and take a lot of time and anguish to correct. 

Opponents to this move state that removing this data from a person’s credit report may make them LOOK better, but it doesn’t IMPROVE the risk a lender takes when lending to them.  According to LexisNexis Risk Solutions, whose parent company is a large provider of data to the Big Three, consumers with liens or judgments are twice as likely to default on loan payments.  The folks at LexisNexis go on to say that nearly all judgments will be removed and about half of tax liens will be removed from credit reports as a result of the changed approach.

According to the folks at The Wall Street Journal, these credit report changes will help just under 11 million people boost their FICO scores by 20 points and approximately 700,000 people boost their scores by 40 points – combined, that’s about 6% of the US population who have FICO scores.  In the grand scheme of things – scores range from 300 to 850 – a 20- or 40-point bump isn’t THAT big of a deal.  However, for someone who has a 550 FICO and needs to come up with a 10% down payment for an FHA loan, if they got that 40-point boost, they would only need to come up with a 3.5% down payment for the same loan.  On a $200,000 house, that’s the difference between coming up with $20,000 versus $7,000.  So, for THAT person, THAT IS a big deal. 

As I said earlier, this development is sort of bittersweet.  Institutions that loan money like to make money, so they’ll find ways to hedge against the risk that these changes will present – one of the more obvious ways, of course, will be an increase in lending rates, which everyone will get to “share”. However, they also like a market where their customers are calm and want to borrow money, which means they’re not going to make any changes at this very minute. 

If you already have good credit, but you’re on the fence about a purchase, this should be subtle enough of a shove to get you off of it.  If your credit score is less than stellar, don’t wait for the July 1st developments – we can help you improve your credit now and get you out in front of all this before that time.  We don’t have a magic wand, but we still put on a pretty good performance every day of the week – twice on Wednesdays.

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